Christmas ISN’T Canceled

What a mess!

Buyers are melting down following Wednesday’s Powell presser, crushing the hopes and dreams of a market melt-up into the holidays.

This week’s rate cut didn’t register on most folk’s radar. After all, a 25 basis point cut was a sure thing. What the market clearly wasn’t expecting were Powell’s comments that the FOMC wasn’t planning on as many cuts in 2025 as advertised.

Keep in mind, we’ve been dealing with bad breadth and plenty of sneaky downside action for weeks. But Powell gave the herd what it wanted: an excuse to sell.

And they did.

The S&P reran the August sell-off. The Nasdaq cratered 3.5%. And the Dow dropped over a thousand points!

The mid-week action had all the hallmarks of a washout, so what’s really going on in the markets as stocks attempt to stabilize?

Let’s dig in…

Poor Papa Dow!

The big board has fallen on hard times, registering its first 10-day losing streak since 1974. That’s right, it’s been 50 years since the Dow has experienced a similar run into the red!

It’s beginning to feel like Powell canceled Christmas, and Santa Claus will skip over Wall Street this year. Who knows?

One thing is for certain, though: Unusually long runs such as this are destined to end.

The Dow is still trading above an upward-sloping long-term average. The uptrend remains intact despite the longest spell of downside action in five decades. Impressive.

Also, note where it’s coming from…

The Dow started the month trading more than 10% above its 200-day moving average – the upper limits of this year’s range.

Whether discussing a run of consecutive down days or the percentage move above a long-term average, extreme readings revert to the mean.

We’ve already witnessed it in price and should witness it again when the 50-year storm lets up. And when it does, melt-up conditions will return.

But buyers must step in now, not next week, and certainly not after the holiday break.

Mark your calendars! The Santa Claus rally starts today.

Breadth Stinks!

Every time the market comes under pressure, pundits begin discussing market breadth (the number of stocks participating in the uptrend).

It’s no secret: Participation is deteriorating beneath the surface as the number of stocks sinking to fresh lows outnumber the issue gracing the new highs list.

Unfortunately, many use this information to pump fear.

Today, more S&P 500 stocks closed red than any other day this year…

The bullish breath regime is over…

The Hindenburg Omen has triggered…

It’s all true. Market breadth has been particularly bad as 97% of the stocks in the S&P 1500 (large, mid, and small-cap indexes combined) posted negative returns mid-week.

But as ominous as it all sounds, the bull market has been here before…

The single-day rate-of-change (bright blue line) indicates Wednesday’s selloff was on par with the Aug. 5 fiasco. However, the number of declining vs. advancing stocks fell short of levels reached on Feb. 15.

The prevailing consensus pins the summer downturn on an unwind in yen position. But does anyone remember what happened in February? (I don’t, but my gut tells me it was Fed-related.)

Regardless, the S&P 500 closed Feb. 15 at 5,060 – almost a thousand points below where it sits today. Plus, the two previous downturns in the Russell 3000 Index advance-decline line led to strong recoveries. That’s how bull markets operate.

Selloffs are never easy. Fear runs rampant even if stocks roll over at all-time highs.

Instead of tuning into the mainstream media, identify the larger trend, contextualize the hype, and remember price doesn’t move in a straight line.

Reflation Makes an Early Appearance

Despite last week’s mad dash for cash, Christmas hasn’t been canceled.

In fact, not all assets are selling off…

Remember cocoa’s 47-year base breakout last year?

Cocoa hit another new all-time high earlier this week.

Like it or not, you can’t ignore some of these colossal breakouts. I’ve been pounding the table on the reflation taking center stage in 2025. But it’s taking off earlier than I expected.

If today’s agriculture rallies mimic the 1970s bull runs, cocoa will likely see another 400%+ markup. That would push prices as high as 27,000!

It doesn’t matter if we’re tracking cocoa, cattle, or gold. The charts continue to suggest markets have entered an inflationary regime…

We must prepare for rising rates and soaring commodity prices that could last another five to ten years.

Don’t worry. New market regimes provide new opportunities.

As always, there will be plenty of stocks we’ll want to buy, but they won’t all be the high-flying tech names of the past.

That means we’ll need to be open-minded, nimble, and focused on stocks many of us haven’t traded in twenty years — something to consider as the melt-up cools and Q1 2025 approaches.

Have a good holiday, see you next year!